RISK vs. RISKY BEHAVIOR

    I was in a real estate chat room the other day and read a statement by one of the contributors about all real estate investments being risky.  Somebody replied with "no risk = no gain".  This got me to thinking about the investments that I have and how much risk is involved. Some people think I take big risks. I don't think so. 

            You see, investors like us can control our risk. Risky behavior is jumping out of a plane with a parachute that hasn't been inspected. On the other hand, a jumper that has taken classes, packed and repacked his parachute, has a back up parachute, plans his jump and landing spot, arranges his pick up and THEN jumps out of the plane has evaluated the risk, planned for the risk and then made a decision based on these actions.  This is not a risk taker. 

             Speculating is risky, investing should NOT be. 

            Buying with out nvestigating and a solid exit strategy is risky. Buying after investigating, planning your strategy and KNOWING your risks, is smart. 

Let's look at some of the factors that affect our risk:  

  1.       The Market Trend

            We do not control the trend and we cannot depend on it, but we CAN look at the history and make some educated projections on how the market will affect the value of our investment and the rentablity of it. 

  2.       The Developer

            What has he done before? Will he be around when I want to sell? How has his other projects done? I need to evaluate his sales staff, his marketing plans, his   phases, the condo docs, rental restrictions, monthly fees, etc.

   3.       The Product

            Select your purchase, based on what the historical demand has been.

   4.       Price

            Are we buying early enough or low enough to be able to sell, pay commissions and selling cost and still make a profit?

   5.       Uniqueness

            Am I buying one of many that will be on the market when I want to sell, or am I buying the penthouse, the end unit, etc.

   6.       Can I afford to close?.

            If you cannot - do not buy. Remember, there are things that we can control like price, furnishings and whether or not we buy. We cannot control planes flying into buildings, the interest rate or the whim of the buyer. If you cannot afford to close, you have not only changed the risk, you have changed your EXPOSURE to that risk. 

  7.       The Broker

            Of course, I as a broker, think I have a role in the risk. First, I evaluate the risk along with you. Second, I have an interest in you being happy, happy enough to return and invest in more property.

   8.       Stability of Financing 

            Lock in a rate and your exposure is lower.  Get a floating rate that is lower and you run the risk of hurting your cash flow should the rate jump.

  9.       Upgrades and Furnishings  

            Buyers that want to buy a condo, would prefer to buy a turn key living space. Complete with all the furnishings.  Furnished units will sell more quickly and at a higher price than unfurnished.

10.       Size of Loan

            The bigger the loan, the more the exposure.

11.       Pre-sell or Pre-rent

            I am a big believer in this technique.  If at all possible, set your exit strategy before you buy.

12.       Persevere

            Stick to it, be persistent and stay the course. Do not be swayed by Uncle Henry's email about a bubble in the real estate market reported in the LaCrosse Gazette.

13.       Don't be Greedy

            Take your profit and move to the next deal. Go forward and do not hang around for that extra buck.

 14.      Set Goals

            Most importantly, set your goals and objectives. Write them down, know them intimately and then evaluate your decisions based on these goals.

© Copyright 2008 Gregg A. Fous All Right Reserved

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Gregg

Gregg@ma-realty.com

www.ma-realty.com